Coming up with a large enough down payment to purchase a house can be a challenging task. Sometimes family members or others want to assist homebuyers with coming up with the down payment by gifting them the funds. While this is an incredibly thoughtful gift, if it is not handled properly it can cause more problems than solutions.
Here is what homebuyers need to know before giving or receiving gifted funds for a down payment.
For this process to work the money has to truly be a gift. There cannot be repayment of the funds. To ensure that this is how the gift is setup the person gifting the funds is required to write a letter stating that the money is not a loan and will not be repaid. If in the future the lender is to look into the situation and find that the homebuyers have been repaying the gifted amount back, both parties could be facing legal trouble.
There are two options when it comes to receiving a gift and one is much easier to work with than the other. The first option is to receive the money early in the process and deposit it into your account. If the lender is able to see that the funds have been in your bank account for months, you will not have to prove that it was a gift.
The second option is to wait until you are headed to closing to collect the funds from the gifter. This process is more complicated because the person gifting the money will have to go through several different steps to prove that they have the funds available to give.
There is an annual limit on the amount that someone can gift to another person throughout the year. If the funds gifted are over this amount then the difference will be taxed. The current limit is $14,000 per donor. As an example, if your grandparents are gifting you the funds for your down payment, they can give you $28,000 without incurring any tax limitations.
If the funds that you are receiving are going to show as a gift they are going to need to be verified. This can be a little awkward for the person/people that are gifting the money. They will be required to show complete bank statements to the lender. This will include their transactions, account numbers and names.
The lender needs to verify that the funds are available and that the person giving the money can afford to do it. They need to ensure that they will be able to afford living after gifting the money.
If you have someone that is willing to gift you money for your down payment make sure to communicate the lender requirements to them from the beginning, along with your appreciation. If you are considering gifting funds to someone for their down payment, consider these points to make sure you can afford to do it. Gifting the funds early in the process can ease the amount of verification that will be required throughout the process.